Hyundai

Hyundai Motor Company – Hyundai Motor Company – Beijing Automotive Joint Beijing Automotive Joint

VentureVenture

April 30April 30thth, 2003, 2003Topics in Emerging MarketsTopics in Emerging Markets

Richard LeeRichard LeeKevin ParkKevin Park

Michael ChengMichael Cheng

Agenda.Agenda.

Case Study IntroductionCase Study Introduction Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

Case Introduction.Case Introduction. In 2003, Hyundai has an investment of $250 million in China in In 2003, Hyundai has an investment of $250 million in China in

conjunction with Beijing Automotive to produce 100,000 units per conjunction with Beijing Automotive to produce 100,000 units per year year

Hyundai projects and plans production to be 200,000 units per year Hyundai projects and plans production to be 200,000 units per year by 2005by 2005

Investment Decision: Does Hyundai invest the Investment Decision: Does Hyundai invest the necessary $1.1 billion in year 2005 to increase necessary $1.1 billion in year 2005 to increase production that will yield 500,000 units per year by production that will yield 500,000 units per year by 2010?2010?

A great test run and indicator of Hyundai’s potential as it A great test run and indicator of Hyundai’s potential as it plans to become a global automotive playerplans to become a global automotive player

Agenda.Agenda.

Case Study IntroductionCase Study Introduction Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

Hyundai History & Hyundai History & DevelopmentDevelopment

Established in 1967, Hyundai is presently South Korea’s #1 Established in 1967, Hyundai is presently South Korea’s #1 carmaker, manufacturing dozens of models of cars, vans, and carmaker, manufacturing dozens of models of cars, vans, and minivansminivans

Throughout the past two decades, Hyundai introduced various Throughout the past two decades, Hyundai introduced various models: Pony, Excel, Scoupe, Sonata, and Accent. models: Pony, Excel, Scoupe, Sonata, and Accent.

In 1990, Hyundai introduced its own engine design, the Alpha. In 1990, Hyundai introduced its own engine design, the Alpha. Two years later, it introduced its second-generation engine, Two years later, it introduced its second-generation engine, the Beta. the Beta.

Acquired a 51% stake in Kia Motors in 1998Acquired a 51% stake in Kia Motors in 1998 In 2001, Hyundai sold a 9% stake to DaimlerChrysler to In 2001, Hyundai sold a 9% stake to DaimlerChrysler to

strengthen its global market position and to boost sales strengthen its global market position and to boost sales abroadabroad

Hyundai Current Market Hyundai Current Market ShareShare

Agenda.Agenda.

Case Study IntroductionCase Study Introduction Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

South Korea Economic South Korea Economic StudyStudy

South Korea went from having a GDP as low as Algeria’s in South Korea went from having a GDP as low as Algeria’s in 1961 to becoming the world’s 111961 to becoming the world’s 11thth largest economy largest economy

Started to export goods like steel, automobiles, and ships.Started to export goods like steel, automobiles, and ships. South Korea came a long way from the days when it siphoned South Korea came a long way from the days when it siphoned

its scarce capital into strategic industries its scarce capital into strategic industries Politicians and bureaucrats became the instruments for large Politicians and bureaucrats became the instruments for large

businesses, large wage increases and foolish business businesses, large wage increases and foolish business decisions diminished competitiveness, and banks were decisions diminished competitiveness, and banks were ordered by the government to prop up large firmsordered by the government to prop up large firms

These things were all for not when the Asian Financial Crisis These things were all for not when the Asian Financial Crisis hit South Korea. hit South Korea.

South Korea Economic South Korea Economic StudyStudy

The Korean Won fell by 54% to 1962 The Korean Won fell by 54% to 1962 Won/$Won/$

The KOSPI fell by more than 65% in 1997-The KOSPI fell by more than 65% in 1997-19981998

Several major companies went bankrupt Several major companies went bankrupt GDP shrank by 5.8% during this crisis timeGDP shrank by 5.8% during this crisis time

South Korea Political South Korea Political ClimateClimate

In 1997, Kim Dae-Jung was elected as PresidentIn 1997, Kim Dae-Jung was elected as President Kim won a Nobel Peace Prize for his commitment to Democracy Kim won a Nobel Peace Prize for his commitment to Democracy

and his reconciliation efforts with the Northand his reconciliation efforts with the North

Historical, first meeting between the North and the South Historical, first meeting between the North and the South to to discuss joint unification in 2000discuss joint unification in 2000

South Korea’s foreign policy calls for the peaceful resolve of South Korea’s foreign policy calls for the peaceful resolve of their situation with Communist North and any action their situation with Communist North and any action necessary to maintain its own state of democracy necessary to maintain its own state of democracy

Political tension continues to brew within the Korean Political tension continues to brew within the Korean peninsula to this daypeninsula to this day

Agenda.Agenda.

Case Study Introduction.Case Study Introduction. Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

Asian Financial Crisis: Asian Financial Crisis: Pre-crisisPre-crisis

South Korea’s postwar economy was envy South Korea’s postwar economy was envy of other developing countries. System of:of other developing countries. System of:

• High savingsHigh savings• Close cooperation between government and Close cooperation between government and

businessbusiness• Export orientedExport oriented• GNP rose from US$200 (1960) to US$11,500 GNP rose from US$200 (1960) to US$11,500

(1996)(1996)

Asian Financial Crisis: Asian Financial Crisis: CrisisCrisis

Fostered corruption and speculationFostered corruption and speculation Business bankruptcies and employment insecurityBusiness bankruptcies and employment insecurity

• Sharp rise in interest ratesSharp rise in interest rates• Dramatic fluctuations of exchange rateDramatic fluctuations of exchange rate• Collapse of stock priceCollapse of stock price• Exodus of foreign currencyExodus of foreign currency

Major economic crisis and subsequent labor Major economic crisis and subsequent labor unrest in 1997unrest in 1997 General strike calledGeneral strike called Biggest-ever IMF bailout, $57 billion rescue packageBiggest-ever IMF bailout, $57 billion rescue package

Asian Financial Crisis: Asian Financial Crisis: RecoveryRecovery

Strong recovery in 1999-2000, negatively affected by Strong recovery in 1999-2000, negatively affected by global economic slowdown, recover in 2002global economic slowdown, recover in 2002

Fuelled by domestic demandFuelled by domestic demand Increased government spendingIncreased government spending

Reasons for recovery:Reasons for recovery: Break the hold of chaebols over financial sectorBreak the hold of chaebols over financial sector Economy opened up to short and long-term capital from abroadEconomy opened up to short and long-term capital from abroad Companies comply with international accounting standardsCompanies comply with international accounting standards Foreigners account for 40 percent of stock market transactionsForeigners account for 40 percent of stock market transactions

South Korea GDP (1990-2007)

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Agenda.Agenda.

Case Study Introduction.Case Study Introduction. Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

China Macro OverviewChina Macro Overview

China’s doors opened to the world in 1978China’s doors opened to the world in 1978 Experienced over 20 years unprecedented Experienced over 20 years unprecedented

economic growtheconomic growth

Convert from command economy to Convert from command economy to market economymarket economy

Role of State Owned Enterprises (SOEs)Role of State Owned Enterprises (SOEs) Challenge of dismantlingChallenge of dismantling

China and the WTOChina and the WTO

After 15 years of attempts, China joined After 15 years of attempts, China joined the World Trade Organization on the World Trade Organization on September 15, 2001September 15, 2001

Over next 5 years, China will remove Over next 5 years, China will remove barriers to entrybarriers to entry Improve external economic relationsImprove external economic relations Bring in increased competitionBring in increased competition Increase speed of economic reformIncrease speed of economic reform

Economic PerformanceEconomic Performance Large increases in per capita incomeLarge increases in per capita income Rise in non-state sector activityRise in non-state sector activity Growth in exports and domestic demandGrowth in exports and domestic demand

GDP (1980-2007)

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Foreign Direct Foreign Direct InvestmentInvestment

During 2002, China During 2002, China was the world’s was the world’s leading recipient of leading recipient of FDIFDI

China has reduced its China has reduced its import tariff on import tariff on automobiles and auto automobiles and auto parts parts

Agenda.Agenda.

Case Study Introduction.Case Study Introduction. Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

China’s Automobile China’s Automobile IndustryIndustry

State of undergrowthState of undergrowth Due to past regulation of Chinese governmentDue to past regulation of Chinese government

Currently about 25 factoriesCurrently about 25 factories Manufacturers cannot meet quotasManufacturers cannot meet quotas

Steady development and progress over Steady development and progress over last couple yearslast couple years Yearly increase of 6.63% from 1995Yearly increase of 6.63% from 1995

Automotive Industry Automotive Industry OutlookOutlook

Very promising futureVery promising future

• Opening up of Opening up of Chinese MarketChinese Market

• Implementation of Implementation of mass production mass production techniquestechniques

• Increase in Increase in manufacturing manufacturing technologytechnology

Agenda.Agenda.

Case Study Introduction.Case Study Introduction. Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

Hyundai Financial Hyundai Financial Analysis.Analysis.

After the financial crisis:After the financial crisis: Sales of $20 billion worldwideSales of $20 billion worldwide Hyundai has invested $6.25 billion in global Hyundai has invested $6.25 billion in global

expansionexpansion From 300% D/E to 50% D/EFrom 300% D/E to 50% D/E Doubled financial ratios across the boardDoubled financial ratios across the board

• Assets, Revenue, Units Sold, & Return on SalesAssets, Revenue, Units Sold, & Return on Sales Currently trades around 24,000 KRW (4/9/03)Currently trades around 24,000 KRW (4/9/03)

Cost of Capital Inputs.Cost of Capital Inputs. Goldman Sachs Integrated Model:Goldman Sachs Integrated Model:

Model Inputs:Model Inputs: Risk PremiumRisk Premium

• Instead of using the US risk premium of 4.89% which Instead of using the US risk premium of 4.89% which represents the geometric mean of the historical returns represents the geometric mean of the historical returns from 1961, we decided to use a risk premium of 9.44%. from 1961, we decided to use a risk premium of 9.44%. Our reasoning for this change primarily deals with our Our reasoning for this change primarily deals with our assumption that the previous risk premium wouldn’t be an assumption that the previous risk premium wouldn’t be an accurate representation of returns in this particular model. accurate representation of returns in this particular model. The latter risk premiums are those returns only from 1991, The latter risk premiums are those returns only from 1991, a reasonable change being that we were valuing an a reasonable change being that we were valuing an emerging market company. emerging market company.

mf SYSrR

Cost of Capital Inputs.Cost of Capital Inputs.

Sovereign Yield SpreadSovereign Yield Spread• To calculate this spread, which is crucial in this To calculate this spread, which is crucial in this

model, we subtracted the 10 year US bond rate of model, we subtracted the 10 year US bond rate of 3.87% from the 10 year Korean bond rate of 3.87% from the 10 year Korean bond rate of 8.80%. 8.80%.

Although we could only find a 3 year Korean bond rate, Although we could only find a 3 year Korean bond rate, we prorated this rate over 10 years.we prorated this rate over 10 years.

Appropriate Discount RateAppropriate Discount Rate• 13.71%13.71%

Equity Valuation.Equity Valuation.Riskfree Rate

4.91% Bloomberg as of March 28, 2003BetaKorean MSCI World Beta 0.41 Information taken from J.P. MeiSource http://pages.stern.nyu.edu/~jmei/b40/L9s1.pptRisk Premium1991-2001 9.44% Geometric average from DamadoranSource http://pages.stern.nyu.edu/~adamodar/pc/datasets/histimpl.xlsMarket Value of EquityMarket Cap 5,477,000,000,000.00Shares Outstanding 219,080,000.00Share Price W25,000Source Yahoo! Finance as of March 28, 2003Government Rates10 Year US Bond Rate 3.87% Bloomberg Website10 Year Korean Bond Rate 8.80% www.businessweek.com:/2000/00_02/b3663255.htmSovereign Yield Spread

4.93% SYS = Local Market Bond Rate - US Bond RateSource SYS Formula taken from J.P. Mei lecture March 10, 2003Discount Rate Formular= rf+SYS+β(US Market Premium) 13.71% Goldman Sachs Integrated Formula

Growth Rate: 7.00%

Free Cash Flow to Equity 2002: 420,500,000,000.00 Information taken from Deutsche Bank Valuation of Hyundai Motor

Equity Valuation: FCFt+1/(r-g) 6,705,039,938,006.68Price Per Share: 30,605.44 Korean Won

Actual Price 3/38/03 25,000 Korean Won

Recommendation: BUY Hyundai is undervalued.

Goldman Sachs Integrated Model Inputs:

Equity Valuation Equity Valuation Summary.Summary.

Conclusion on Hyundai Motor Company:Conclusion on Hyundai Motor Company: Using the Gordian Growth stable growth DCF model Using the Gordian Growth stable growth DCF model

for equity valuation, we found the value of the for equity valuation, we found the value of the company as 6.7 trillion won. company as 6.7 trillion won.

Hyundai, having 219 million shares outstanding, Hyundai, having 219 million shares outstanding, translates into a target price of translates into a target price of 30,605.44 won30,605.44 won. .

Currently, Hyundai Motor Corp (Ticker: 05380.KS), Currently, Hyundai Motor Corp (Ticker: 05380.KS), last traded at last traded at 25,000 won25,000 won on March 28, 2003. on March 28, 2003.

Recommendation: BUYRecommendation: BUY Hyundai is an undervalued company that has great Hyundai is an undervalued company that has great

global potential..global potential..

Agenda.Agenda.

Case Study Introduction.Case Study Introduction. Hyundai Motor CompanyHyundai Motor Company South Korea OverviewSouth Korea Overview Impact of the Asian Financial CrisisImpact of the Asian Financial Crisis China OverviewChina Overview Chinese Automotive IndustryChinese Automotive Industry Hyundai Financial AnalysisHyundai Financial Analysis Case SolutionCase Solution

Case Study Summary.Case Study Summary.

Hyundai agreed to pay $250 million in a Hyundai agreed to pay $250 million in a joint venture with Beijing Automotive.joint venture with Beijing Automotive. Starting at 100,000 units in 2003, plans to Starting at 100,000 units in 2003, plans to

expand to 200,000 units by 2005.expand to 200,000 units by 2005. If the production is a success, Hyundai will If the production is a success, Hyundai will

invest $1.1 billion to increase productivity to invest $1.1 billion to increase productivity to 500,000 by 2010.500,000 by 2010.

Is the investment in China’s emerging Is the investment in China’s emerging market a good move by Hyundai?market a good move by Hyundai?

Project Summary Inputs.Project Summary Inputs.

Cash Flows Assumptions:Cash Flows Assumptions: Invoice prices of the Sonata & Elantra are Invoice prices of the Sonata & Elantra are

global pricesglobal prices After finding this revenue stream, we After finding this revenue stream, we

calculated the cost of each car by using calculated the cost of each car by using Hyundai’s historic profit margin per car of Hyundai’s historic profit margin per car of 20%. 20%.

50% of revenue would go to Beijing 50% of revenue would go to Beijing AutomotiveAutomotive

Project Summary Inputs.Project Summary Inputs.

Cost of Capital:Cost of Capital: In our previous valuation of Hyundai, we In our previous valuation of Hyundai, we

calculated the relative cost of capital for all calculated the relative cost of capital for all Hyundai’s future projects of 13.71%. Hyundai’s future projects of 13.71%.

Appropriate discount rate since Hyundai will Appropriate discount rate since Hyundai will finance the project with firm assets like equity finance the project with firm assets like equity and cash.and cash.

Project Summary Inputs.Project Summary Inputs.

ProductionProduction Starting at 100,000 units, production will Starting at 100,000 units, production will

increase by 50,000 till 2005 ultimately increase by 50,000 till 2005 ultimately producing 200,000 unitsproducing 200,000 units

From 2005 to 2010, production will increase From 2005 to 2010, production will increase 60,000 units per year60,000 units per year

Hyundai-Beijing MotorHyundai-Beijing MotorProject Valuation.Project Valuation.

Year: 2003 2004 2005 2006 2007 2008 2009 2010Units: 100,000 150,000 200,000 260,000 320,000 380,000 440,000 500,000Elantra: 50,000 75,000 100,000 130,000 160,000 190,000 220,000 250,000Sonata: 50,000 75,000 100,000 130,000 160,000 190,000 220,000 250,000

Revenue: In MillionsElantra @ 11,274.00$ 563,700$ 845,550$ 1,127,400$ 1,465,620$ 1,803,840$ 2,142,060$ 2,480,280$ 2,818,500$ Sonata @ 13,822.00$ 691,100$ 1,036,650$ 1,382,200$ 1,796,860$ 2,211,520$ 2,626,180$ 3,040,840$ 3,455,500$

Cost:Elantra @ 9,019.20$ 450,960$ 676,440$ 901,920$ 1,172,496$ 1,443,072$ 1,713,648$ 1,984,224$ 2,254,800$ Sonata @ 11,057.60$ 552,880$ 829,320$ 1,105,760$ 1,437,488$ 1,769,216$ 2,100,944$ 2,432,672$ 2,764,400$

Profit:Elantra: 112,740$ 169,110$ 225,480$ 293,124$ 360,768$ 428,412$ 496,056$ 563,700$ Sonata: 138,220$ 207,330$ 276,440$ 359,372$ 442,304$ 525,236$ 608,168$ 691,100$ Total: 250,960$ 376,440$ 501,920$ 652,496$ 803,072$ 953,648$ 1,104,224$ 1,254,800$

Hyundai's Share50% Share of Profits: 125,480$ 188,220$ 250,960$ 326,248$ 401,536$ 476,824$ 552,112$ 627,400$

Cost of capital: 13.71%

NPV: In MillionsInvestments: ($250,000) ($1,100,000)Cashflows: 125,480$ 188,220$ 250,960$ 326,248$ 401,536$ 476,824$ 552,112$ 627,400$ PV of Plant: 110,351$ 145,569$ 170,690$ 195,143$ 211,218$ 220,580$ 224,614$ 224,468$

NPV $152,633.45 POSITIVE!!!!

DCF Valuation on Hyundai-Bejing Auto Joint Venture in China

Project Summary.Project Summary.

After doing a DCF valuation of the Hyundai-After doing a DCF valuation of the Hyundai-Beijing Motor project, we get a positive NPV of Beijing Motor project, we get a positive NPV of $152,633,450 for the 8 year project. $152,633,450 for the 8 year project.

Although this valuation may not be entirely Although this valuation may not be entirely accurate because factors like inflation, political, accurate because factors like inflation, political, social and economic risk are not wholly social and economic risk are not wholly accounted for, we believe that it is a reasonable accounted for, we believe that it is a reasonable and rational valuation and will offer a reference and rational valuation and will offer a reference point for the project. point for the project.

Project OutlookProject Outlook

In order to be successful:In order to be successful: Must form synergies on all levels with China Must form synergies on all levels with China

and Beijing Automotiveand Beijing Automotive Hyundai must use their experience in Hyundai must use their experience in

investing in 4 other plants in Chinainvesting in 4 other plants in China Take advantage of the first mover opportunity Take advantage of the first mover opportunity

in China’s deregulated auto marketin China’s deregulated auto market

RelevanceRelevance

Great opportunity for Hyundai’s business Great opportunity for Hyundai’s business developmentdevelopment

Tremendous global growth potential Tremendous global growth potential

Bottom lineBottom line: : There is lots of money to be There is lots of money to be discovered and made in the emerging discovered and made in the emerging markets of Korea and China!!!markets of Korea and China!!!

Thank You.Thank You.

Questions?Questions?